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Hot Commodities

January 18, 2005

Talk to any financial advisor or read a book about saving for retirement and the word diversification comes up time and time again. Diversify, diversify, and diversify. Like your mom told you: don't put all of your eggs in one basket.

For too many people, diversification means putting a certain percentage of your money in stocks and the rest in bonds. But, what's a person to do when stocks are overvalued on a historical basis and bond yields are near all time lows? Clearly neither asset class is a bargain and retirement is just around the corner.

World traveler and legendary investor Jim Rogers says the next bull market will be in commodities and provides a primer for those who really want to diversify with his new book, Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market.

Rogers was the big idea man behind the Quantum Fund. While the other co-founder George Soros did the trading, Rogers provided the history and economic knowledge for Quantum and the fund generated a 4,000 percent return in the 1970's, allowing Rogers to retire.

Despite his prescient market calls and success, Rogers is generally viewed as a maverick at best and just plain crazy at worst. On the Saturday morning FOX investment shows he is typically ridiculed for both his investment and political views. While the other guests are providing the same warmed-over stock recommendations, Rogers tells viewers to stay away from stocks and start investing in things.

"Nearly every time I strayed from the herd, I've made a lot of money," writes Rogers in the books introduction. "But, when you make some money going against the grain, you're no longer crazy; you're just 'lucky.'"

Why commodities now? Well, actually commodities have been doing better than stocks, bonds and even real estate for the past few years. But, commodity bull markets take a couple of decades to play out, so Rogers thinks there is still plenty of time to get in.

First of all, when the government prints money incessantly, its value falls and the price of things goes up. As Rogers points out: "With the White House in a race with the Federal Reserve to spend money faster than the Fed can print it, the dollar is shakier than ever." Unfortunately, Rogers sees no other currencies that are any better than the dollar.

But most important, when the demand for commodities like oil, sugar, lead and coffee increases due to new demand from China for instance, increasing the supply of any of these commodities is far from a snap. It takes years to gain approvals for mine construction and then more time to build the mines and start producing. It takes years before a coffee seedling begins to produce. Oil production has peaked in Rogers' view. And, the primary producer of sugar — Brazil — devotes much of its supply to the production of ethanol when oil prices are high.

China is the primary force on the demand side of the commodities equation according to Rogers. The twenty-first century will belong to the Chinese and they will dominate the world economy. As the predominately rural Chinese population becomes more urban, their consumption of commodities will skyrocket. China is already the number one consumer of: copper, steel, iron ore and soybeans, and, number two in oil consumption.

It will be a bumpy ride for China, but the upside is enormous. Only four percent of the Chinese people own cars, the population's sugar consumption is less than one sixth that of the US, and the annual per capita coffee consumption in China is less than half a pound while Americans drink 20 gallons a year.

Goldbugs will be disappointed with Rogers who feels that "following an obsession is not the best investment philosophy." In fact, Rogers would like to stand the Alchemist's Dream on its head and turn gold into lead. While lead production continues to go down, "the search for gold reportedly accounted for 75 percent of the total ongoing exploration for the world's largest mining companies," Rogers writes. "It is as if mining professionals were as gaga over gold as the general public." And, at the same time demand for the yellow metal is tepid, demand for lead, an essential component to SVI vehicle batteries, is growing.

While most of the book is devoted to the big picture of why commodities are in a bull market and will continue so, Rogers spends a couple of chapters on the various vehicles available to investors and the arcane terminology used in futures trading.

Rogers scoffs at the old canard that commodities are risky and backs his opinion up with results from a 2004 study from the Yale School of Management's Center for International Finance. According to the study, not only do commodities have less risk than stocks and bonds, they provide better returns, are negatively correlated to stocks and bonds and positively correlated to inflation. The study also found that commodities futures returned triple the gains that investing in the stocks of commodities companies did.

Rogers cautions the reader that one can't invest in commodities blindly. Research is required to get "lucky." Hot Commodities is the best place to start your research into how to truly diversify your assets and ride this decades bull market.

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